Founders Rights - Terms for Serious Entrepreneur Founders - Post #1

For most entrepreneurs, particularly first time entrepreneurs the last thing they are thinking about is how to structure their Articles of Incorporation, By Laws, Classes of Preferred Equity, Voting Rights and many of the other seemingly innocuous details that are done at the time their company is legally formed.  They are thinking about building their product, selling it, how much savings they have left before they cant make the mortgage payment, and wondering if they can get the limit on their master card increased so they can finance the laptop they need and still make payroll.  Incorporation is an annoying detail they want to get done as cheaply as possible, hello, LegalZoom I need a corporation....

Professional Investors such as Venture Capitalists and other Private Equity investors however focus heavily on these seemingly mundane details and have decades of experience in knowing the ins and outs of how to best structure these documents to their advantage.  It's smart business on their part. For example, using something called a liquidation  preference they ensure that they get all their money back before anyone else sees a dime.  If they invest $5 Million dollars for 30% of your company and a few years later your company sells for $10 Million, they get their $5M first and then you all share pro-rata in the remaining $5M, meaning they get $6.5M total,of the $10M so the remaining Common stock shareholders split $3.5M instead of $10M.  This is just one of the tools you will find in their bag of "terms" that typically come with their investment capital.

In this post Im going to share with you some terms of your own that you may want to consider for your By Laws etc.. Here is where I must say I am not a lawyer and not offering legal advise or documents, just sharing the many years of my experience on both sides of a Venture Deal.  I have been either a founder seeking capital or an investor providing it in over 20 transactions, totaling over $100M, and this is just growth financings, including public offerings and selling of whole companies, the number is closer to $1B.  

Generally these terms I am going to suggest are taking the very looooong view of your new baby, your company.  Very few will ever build a company from nothing to one that lasts more than a decade and generates 100's of millions or more in annual revenue but it is for those rare cases that I suggest these type of terms.

there are many different ways in which you could implement special rights and terms, in this example I am sharing an overall term sheet.  Your attorney would implement in various parts of the corporate legal documents but mostly in your by laws.  In my next post I'll explain why some of thees matter to you.

Founder’s Rights Agreement

1.       Registration Rights – Founders and their permitted transferees are entitled to “priority piggyback” registration rights pursuant to which they will be entitled to cause the Company to use commercially reasonable best efforts to register a portion of their shares of Common Stock and participate in the Company’s registration of securities under the Securities Act of 1933.

2.       Right of First Refusal of Sales of Founders Common.  In the event of a proposed sale of Common Stock held by a Founder or their successor, other Founders will have first rights to purchase the stock on the same terms as Founder when Founder has received a written bona fide offer to purchase from a financially qualified buyer.  If Founders pass on this option to purchase, the offer of this right passes next to Series A holders and then to the Company.

3.       Founder Termination – Termination of a Founder for any reason other than Cause, as defined below, requires a Super Majority vote of the Board of Directors.  Termination for any reason other than Cause, including Constructive Termination, will trigger any severance clause of a Founders employment contract as well as The “Founders Conditional Lifetime Benefit Plan”. 

a)      Constructive Termination is defined as the occurrence of any of the following:  (i) a non-voluntary reduction in compensation which is greater than 10% and which is not part of an overall pay reduction undertaken by the Company to reduce costs or (ii) a change in the Founders physical reporting location beyond 35 miles or 1 hour total commute time each way based on standard daily commuter traffic from their then current work location and in which the Founder is not permitted to telecommute and causes Founder to report in person more than; a) 4 days per month for total commutes over 1.5 hours each way or b) 2 days per month for commutes in excess of 1.5 hours each way but within the continental US or c) 1 day per month outside the continental US.   (iii) a changing of the founders role or title and responsibilities with the Company does not constitute Constructive Termination provided however such change does violate other provisions above.

b)      Termination for Cause is defined as: (a) if a Founder is convicted of a felony, including any crime of moral turpitude, or (b) if a Founder willfully, in bad faith and materially breaches the Company’s Confidentiality and Proprietary Agreement;  or (c) Any intentional misconduct by a Founder that has a materially adverse effect upon the Company’s reputation or business;  or (d) Theft, dishonesty or falsification of any employment or Company records by a Founder; or (e) any continued acts of insubordination by a Founder which materially impact executive management’s ability to effectively conduct their duties and which occur after Founder has received a written warning of such act which includes written counseling on how to cure and a 30 day opportunity to correct.

4.       Founders Conditional Lifetime Benefit Plan

a.       Term & Termination - This Agreement will commence no sooner than 15 years from the Date of Signing and in the event the Founder has been terminated as defined above (“Effective Date”).  This Agreement will continue until the sooner of (i) the Founders death or (ii) upon completion of a change in control of The Company in which Company is not the surviving entity (This does not include an IPO or Merger of Equals as defined by a professional opinion), or(iii) in the event the Founder breaches their obligations herein.

b.      Founder Obligations – Upon termination of Founders employment or other paid service to the Company, The Founder agrees not to represent to any person or entity that they are an employee or affiliate of the Company and not to engage in activities on behalf of Company or represent in anyway that they speak for the Company or have authority to cause the Company to engage in any agreement, transaction or other obligation.  Founder agrees all Severance rights terminate should they violate this clause or any other surviving portions of their contractual obligations to Company.  In particular Founder agrees not to use their business card or email address to effectuate the impression they are still affiliated with the Company.

c.       Lifetime stipend – Beginning on Effective Date and paid per annum thereafter, Company will pay Founder a stipend in the amount determined in table (a), triggered only after employment terminates, and adjusted every 2 years for inflation based on CPI.  Paid only in the event company is profitable based on GAAP.  In the event company is not profitable, stipend is suspended until such time as company is profitable.  Table (a): Annual EBIT > $10M = $100k; Annual EBIT > $15M = $200k; Annual EBIT > $20M = $300k.

d.      Lifetime healthcare - Beginning on Effective Date, the Company will provide Lifetime healthcare coverage for the Founder and their family at the same coverage level as other Company C-level executives.

e.      Auto lease - Beginning on the Effective Date, the Company will provide the Founder a monthly transportation allowance of $1000 per month, adjusted every 2 years from the date of signing of this Agreement for inflation based on CPI, paid in whatever manner is most financially advantageous to the Company.

f.        Lifetime email address.  Beginning on the Effective Date, the Company will ensure it maintains the Founder’s Company email address.  For company security it’s acceptable for the Company to forward email to alternate address provided by founder or use other means which the Company’s security department deems preferred.  Access to Company’s internal email system is not required.  If the founder misrepresents his/her self as a legal representative or spokesperson of the corporation or violates any other legal commitments founder is obligated to with regard to the corporation, this right terminates.

g.       Lifetime business card - Beginning on the Effective Date, the Company will provide up to 250 business cards per year as and if requested by Founder.  Business Cards will contain Founders name, co-founder title and contact information as provided by Founder.  At Company’s option, Cards may use a style which differs from other Company C-Level executives and may have a unique design while still incorporating some version of the Company’s logo.  Founder agrees the business card is for ceremonial purposes only and is not to be used to represent they are an active employee or representative of the Company.  If the founder misrepresents his/her self as a legal representative or spokesperson of the corporation or violates any other legal commitments founder is obligated to with regard to the corporation, this right terminates.

h.      Support from company PR team for Founder press releases to be released by the Company but related only to personal promotion of Founders charities or new business ventures which the Company deems to not be harmful to the Company including but not limited to any competing business interests.  No political or socially inflammatory releases permitted.  The Company CEO will have final approval of the wording in any release.  If founder is convicted of a felony this right terminates.  Company is obligated to support no more than 1 release per year.

i.         Founder’s charity entitled to direct at least 2% of the Company’s annual charitable donations provided founder’s charity is a legitimate 5013C in good standing which is not involved in politics, violating any US law or of questionable morality.  Violation of these terms causes Company’s ongoing obligation of this right to be terminated.

j.        Perpetual right to Company’s promotional material aka “marketing schwag” commensurate with other c level executives of the Company.

The Break-out Year:  5 years to $1 billion

I’ve had this chart for years.  I first made it back in 2004 to validate some aggressive assumptions I was seeing in a business plan I was reviewing for Westlake Venture Partners.    The interesting fact is you can find similar rapid revenue growth trends in most successful technology growth companies.  I recently added Cisco Systems to the list. I had to dig hard to find their S1 filing which was filed before the SEC was keeping digital records, and guess what, even though it’s growth started in the late 1980’s, and they are a hardware company while all the others here are some form of software, you’ll see the same consistent trend.

The overall thesis here is not to say that all tech companies can do this, but rather to say that it is achievable (perhaps not reasonable) if a company makes the growth assumption of going from $1M to $1B in 5 years.  That said, you better be really darn special to make that claim and odds are you are not (as was the case with company business plan that got me started on this little analysis).    

As an entrepreneur you should dream big, you have to dream big but don’t ever count on this kind of growth.  This kind of growth is an outcome of stellar planning, solid management and a special kind of luck and timing that all Venture Capitalists would love to bottle if they could.

About the numbers

These companies all took a different number of years to reach what I call their “Break-out Year” but from the Break-out Year the revenue growth is very similar.  What defines the Break-out Year is growth that is massive as % of revenue over the prior year.  The median growth rate here is 1300%.  Google, as with many things is a success anomaly at 8600%.  I included Facebook even though their Break-out year is below normal at 400% their overall revenue growth is still phenomenal and they achieved over $1B in revenue in less than 5 years.   Note:  As a qualifier I did not consider years where the back to back revenue was less than $1M (this eliminates the law of small numbers, going from $50k to 700k in revenue is big growth percentage but not an indicator of success).

Also, to be clear, the years 1 thru 5 on the chart are not the companies first 5 years of revenue, it is their 5 consecutive years of revenue starting with the year just prior to their Break-out Year.

SaaS Metrics | SaaS Churn Kills SaaS Growth

I am reposting these metrics from Joel York.  Joel has produced hands down the best and most comprehensive series on SaaS business models I have found.  In some cases I will add comments but for the most part this is all Joel's stuff.


This is the first post in a series on SaaS metrics which cover a variety of SaaS financial metric models using simple mathematical heuristics. In the process, I hope to highlight important relationships between key SaaS metrics and develop a short list of valuable SaaS Metrics Rules-of-Thumb.

SaaS Metrics Rule-of-Thumb #1 – SaaS Churn Kills SaaS Company Growth

Consider a SaaS company that acquires new customers at the constant rate of “b” (for bookings), and has a percentage churn rate of “a” (for attrition). The number of customers after n periods of time “C_n” is given by the following formula:

C_n+1 = b + ( 1 – a ) x C_n

C_n = b + b (1-a) + b (1-a)² + b (1-a)³ … + b(1-a)^n-2 + b(1-a)^n-1

C_n = b⁄a x ( 1 – ( 1 -a )ⁿ )

This formula can be approximated at the two extremes of early growth and maturity.

Early Growth	Cn = b x n	acquisition rate x time	(n x a << 1)
Maturity Limit	Climit = b ÷ a	acquisition rate ÷ % churn rate	(n x a >> 1)

These two boundaries are shown in the chart below along with the blue curve representing total customers over time.

As a SaaS company grows, absolute churn increases with the total number of existing customers and will limit growth if new customers are not added at a faster and faster rate.

In the early days, churn is small and the customer base grows unimpeded at the customer acquisition rate. As the customer base grows, the absolute value of churn increases and soon overwhelms new customer acquistion. When the customer acquisition rate, b, equals churn, a x C, then the number of customers coming in the door is exactly equal to the number leaving. At this point further growth is impossible, limiting the total customer base size to the new customer acquisition rate divided by the percentage churn rate. This limit might be more than satisfying if you run a bootstrapped, private SaaS business as your primary means of personal income. But, it is unlikely to satisfy investors if you are a VC-backed SaaS startup, bringing us to…

SaaS Metrics Rule-of-Thumb #2 – New Customer Acquisition Growth Must Outpace Churn

The bad news is that if you want to grow your SaaS company without limits, you can’t just sit back and book a hundred new customers per year and expect recurring revenue to accumulate, because sooner or later churn catches up with you. You must not only acquire new customers, but you must acquire them at an increasing rate that outpaces your increasing churn.

SaaS churn scales with the customer acquisition rate.

The good news is that the lower your percentage churn rate, the longer you have to figure it out, because churn lags behind customer acquisition for a time equal to one divided by the percentage churn rate. But, the reality of this SaaS metric rule-of-thumb is that churn relentlessly chases the new customer acquisition rate, and if customer acquisition growth doesn’t outpace churn, overall growth will slow and eventually stop.

In the next post in this SaaS Metrics series, I’ll explore how viral growth is the surest path (albeit not the only path) to achieve the goal of SaaS Metrics Rule-of-Thumb #2 above and break the chains of SaaS churn.

SaaS Metrics Math Notes

This relationship between SaaS churn and SaaS growth can also be derived (somewhat more cleanly) using a continuous model as a function of time, “t”, rather than a discrete model as a function of the number of periods, n. For those that remember their college calculus, the model is represented by the linear first order differential equation: C’(t) = b – a C(t) with the solution: C(t) = b⁄a ( 1 – e^-at ). The first graph above is plotted using this continuous solution.

The second SaaS metric rule of thumb above can be shown using asymptotic methods, such that even for increasing customer acquisition b(t), the total SaaS churn rate a C(t) approaches b(t) over time, i.e., SaaS churn chases the acquisition rate.

It is also worth mentioning that this SaaS metrics model applies not only to SaaS, but to any subscription-based business.

RV Battery Wiring 6 volt in series and parallel

In case anyone else is looking for this.  I could not find one so I made my own,  this is to wire 4(four) 6-volt deep cycle batteries in Parallel AND in Series - this is the confusing part.  Most RV's use 2(two) 6 volt batteries in Series to create 1(one) 12 volt battery and then connect both in parallel to double the amp hours.  The theory with using 6 volt batteries is because of their design they can be run down to zero and brought back up more times than a regular deep cycle 12 volt battery. 

When connecting batteries in Parallel you are doubling the capacity (amp hours) of the battery while maintaining the voltage of one of the individual batteries.

When connecting batteries in Series you are doubling the voltage while maintaining the same capacity (amp hours).

How to Measure Software teams Efficiency and Productivity

How do you communicate software productivity to non-technical executive peers? The productivity dilemma - What to measure? Productivity is usually expressed as a ratio but this assumes we know what the units of output and input are and that both are continuous and linear.

If you can’t measure input/output it is very difficult to measure productivity. Historical studies and attempts have been made and some of the more well know studies are:

• ITT - Advanced Technology Center (1984)
• USC - System Factory (1990)
• MIT - IT and Productivity (1995)

These studies conclude that the key factors that influence productivity are (yes these are fairly obvious):
◦ requirements and specification clarity
◦ project size and complexity
◦ teamwork, experienced personnel

However they also gave us very poor measures such as lines of code. Any good engineer knows why I don’t need to elaborate on the failure of this measuring stick.

So we’re still left with the question, what do we measure?

We measure our process around key dependencies (how we build the software vs. the software itself). We look at the following:

• Requirements clarity – is the problem to be solved well understood and documented.
• Scope management – did we define scope well and manage inevitable change requests
• Reliability – does the software work
• Usability – does the customer adopt it

To accomplish these goals we follow some type of methodology.

• Waterfall, Agile, XP, Iterative, etc.

Why is a methodology important? It creates a clearly defined process that all team members can understand, thereby reducing risk, improving quality and productivity. I will not advocate any particular methodology as better than another. It depends on so many factors includes team size, market dynamics, project complexity etc. Personally I prefer a hybrid Agile - Waterfall methodology which I will outline in another article.

Another important factor in software development is defining and understanding the multiple roles involved in creating software. The roles include:

• Product Management
• Product Designers
• Software Engineers
• Project Management
• Quality Assurance
• Release Management
• Product Marketing

Each role has a unique demand curve in the project lifecycle. I can’t stress enough that A Key factor in productivity and performance is a properly balanced team (in terms of roles) so that there is minimal idle time and minimal bottlenecking in the critical paths.

Now we get to the heart of the matter. We look at what I call Software Units.

Software Units are designed to measure our process. A Unit is established as the most granular level of each role grouped by their contribution to a complete project. A Unit represents people hours contributed to a project and is not a date measurement. Dates must be calculated using units and total resources.

The Unit becomes the core measurement baseline

To create this baseline look at 3 sample project sizes based on your company’s recent history, small, medium and large. No pick a representative recent small project and determine all the roles, resources and hours involved and that will equal one Unit. For example you may have several recent 2 month projects, if this is small you would define it so.

For the rest of the organization to understand how to relate to that we use historical projects in recent memory and assign them a unit value. We do this for each project size. Now peers outside the software dept can relate, and we have a common language.

By graphing each roles contribution in both total time and “demand over time” we can establish the proper ratio of team members. This ratio is key to optimal productivity.

Now we can size projects using a consistent and understood method and can therefore measure our accuracy and consistency.

Next we look at other Measurements including:

• MRD’s or inputs to Software team. Quality of the MRD can be measured in scope creep as well as Product Design time spent clarifying and developing the PRD.
• LOE’s – how well are we estimating
• P1, P2 and P3 bugs into QA, and after GA.
• Date Delivery accuracy.
• Scope change after MRD, PRD, CODE, BETA.
• Relative Time spent in each of the major activities, Analysis, Design, Code, QA between projects of equal size and complexity

How do we reliably hit delivery dates?

• Proper market assessment to product opportunity
• Solid customer needs analysis to prioritize key functions and requirements
• LOE – Level of effort produced by Software is within weeks of actual completion date
• Establish and do not deviate from priorities

“The plans of the diligent lead to profit as surely as haste leads to poverty” -- Proverbs 21:5

Chasing Shiny Objects – Good or Bad?

As disciplined software engineers we are loath to constantly change the “Product Roadmap”. We are trained that “chasing shiny new objects” is the antithesis to disciplined execution. The fact is that is always true with one MAJOR EXCEPTION, fast-growth companies.

In fast-growth companies we are constantly becoming more knowledgeable about our market and our customer. Therefore the Roadmap we built 90 days ago may in fact deserve to be changed because we have gained new domain knowledge. The challenge is deciphering between change because of new knowledge and change because of a whim (shiny new object).

more to come...

Steps to Successful Goal Setting

Desire -You must have a true and honest desire to achieve the goal. You must personally want it, otherwise your subconscious will sabotage your efforts. You must believe it is important. This does not mean goals must have some superior purpose, just that you can't achieve goals for some one else.
i.e. my wife wants a new house but I would really rather have a new boat. To achieve the goal you must resolve within yourself to truly want it or don't waste your time.

Belief -The goal you set must be attainable so make it realistic. For example if you want to double your salary, this is not realistic in a short period so break that down into smaller attainable goals. Increase salary by 20% at a time. However it is important to strike a balance between realistic and challenging.

Write -Write down your goal in very specific detail. Instead of saying my goal is to get a new house, say my goal is to get a 3000 sq. ft. Spanish style home on a hill, with a pool and 3 car garage. This helps you envision the goal which is a critical part of attaining it.

Determine Benefits -Write down how achieving this goal will make your life better.

Analyze your Current Position-Look at you current behaviors, identify both positive and negative behaviors which either help or detract from your ability to achieve the goal. Write these down, focus on positive behaviors and hy to catch yourself in the negative behaviors and stop engaging in them.

Set a Deadline -You must set a measurable and definite deadline.

Identify obstacles -Similar to number 5, look at any obstacles which would impede your ability to accomplish the goal and write them down.

Identify New Knowledge -Think about what information you need to accomplish your goal. Write down any new knowledge you will need to get in order to accomplish the goal.

Identify Required Assistance -Identify any people, groups, companies etc. from whom you will need help or information to accomplish your goal and what you will need from them.

Write Down a Plan -This is a critical part of accomplishing your goal. Having completed the preceding steps, write down all the activities you will need to do. Identify dependencies, prioritize them and assign a time estimate to each. Sort by priority and dependency. Revise this as necessary. Often you may learn new information on the way which requires changes to your plan.

Regularly Visualize your Goal as Accomplished. This is why step 3 is so important. Imagine yourself achieving the goal, feel it, picture it. Imagine yourself in the future living and doing new things with your goal an accomplished part of your past.

Be Determined and Persistent -Don't give up when you run into setbacks, you only fail to achieve a goal when you stop working at it.